--%>
Assignment Help - homework help

Effect of shipping costs

Assume that pound is being pegged to the gold at 6 pounds per ounce; on the other hand the franc is being pegged to the gold at 12 francs per ounce. Which, of course, states that equilibrium exchange rate must be the two francs per pound? If existing market exchange rate is 2.2 francs per pound, how you would take benefit of this condition? Explain about the effect of the shipping costs?

E

Expert

Verified

Assume that you required buying 6 pounds by using the French francs. If you will buy 6 pounds directly in foreign exchange market, it can cost you 13.2 francs. Otherwise, first you can buy an ounce of gold for 12 francs in France and then ship it to the England and sell it for the 6 pounds. Now, it will only cost you the 12 francs in order to buy 6 pounds. It is therefore valuable to ship gold as a result of the overpricing of the pound. Evidently, you may have an arbitrage profit by selling the 6 pounds for 13.2 francs in foreign exchange market. Arbitrage profit can be 1.2 francs. Up till, we have assumed that the shipping costs don’t exist. In case, it costs more than 1.2 francs to ship an ounce of gold, there may be no arbitrage profit.

   Related Questions in Financial Accounting

  • Q : What is Liability Management Liability

    Liability Management: The procedure by which financial institutions balance outstanding liabilities, like deposits, CDs, and so on, with suitable liquidity reserves. Banks and other lenders employ liability management to decrease liquidity risks and u

    		•
  • Q : Future spot exchange rate Describe

    Describe about the conditions under which forward exchange rate may be an unbiased predictor of the future spot exchange rate.

    		•
  • Q : Matlab Applications in Image and Video

    Image and video processing is most difficult topic in electrical and electronics field. This topic becomes trickier if you are taking use of Matlab in this. Student faces a lot of problem in image and video processing theories. If you are messed up with same difficulties

    		•
  • Q : Psychological Health Psychological

    Psychological Health: The employees have noted in their survey feedbacks that their peer relations are based on trust and are healthy. But the nature of work is such that they see lot of suffering. Their interaction with clients at times is not health

    		•
  • Q : Retail or client market and wholesale

    Distinguish between retail or client market and wholesale or interbank market for foreign exchange?

    		•
  • Q : What do you mean by the term turnover

    What do you mean by the term turnover?

    		•
  • Q : Explain accounting equation in brief..

    what is accounting equation? explain accounting equation and explain its importance?

    		•
  • Q : Real gross profit ratio and standard

    Is real gross profit ratio is bigger than standard gross profit ratio?

    		•
  • Q : Deposit-loan rate spread in Eurodollar

    Explain, how does deposit-loan rate spread within the Eurodollar market as compared to the deposit-loan rate spread in domestic U.S. banking system and why?

    		•
  • Q : Interest rate Give me answer of this

    Give me answer of this question. The prime interest rate usually: A) rises when the Federal funds rate rises. B) rises when the discount rate falls. C) falls when the Federal funds rate rises. D) falls when the Fed sells bonds in the open market

    		•